Stocks are excited, the dollar is bullish for central bank overstage

Passersby wearing protective face masks walk past a stock exchange listing board in Tokyo, Japan February 24, 2022. REUTERS/Issei Kato

SYDNEY, Sept 19 (Reuters) – Shares fell in Asia on Monday and the dollar strengthened as investors braced for a packed week of central bank meetings that are sure to see borrowing costs rise across the globe, with some risk of a super hike in the United States.

Markets are already fully priced for a 75 basis point rate hike by the Federal Reserve, with futures showing a 20% chance of a full percentage point.

They also show a real chance that rates could hit 4.5% as the Fed is forced to tip the economy into recession to curb inflation. read more

“How high will the fund rate eventually have to go?” said Jan Hatzius, chief economist at Goldman Sachs.

“Our response is high enough to generate a tightening in economic conditions that imposes enough on activity to maintain a solid growth path below potential.”

He expects the Fed to increase by 75 basis points on Wednesday, followed by two half-point moves in November and December.

Also important will be the Fed members’ “dot plot” forecasts for interest rates, which are likely to be hawkish, putting the funds rate at 4%-4.25% by the end of this year, and even higher next year.

That risk sent two-year Treasury yields up 30 basis points last week to hit their highest since 2007 at 3.92%, making stocks look more expensive by comparison and dragging the S&P 500 down nearly 5% for the week.

On Monday, public holidays in Japan and the UK got off to a slow start and S&P 500 futures fell 0.2%, while Nasdaq futures fell 0.5%.

EUROSTOXX 50 futures rose 0.2%, while FTSE futures closed flat.

MSCI’s broadest index of Asia-Pacific shares outside Japan ( .MIAPJ0000PUS ) fell 0.5%, after losing nearly 3% last week.

Japan’s Nikkei (.N225) closed lower, but futures suggested an index of 27,360 compared with Friday’s close of 27,567.

China’s central bank went its own way, cutting a repo rate by 10 basis points to support the ailing economy, sending blue chips (.CSI300) up 0.1%.

A HERO TO TIGHTEN

Bank of America’s latest fund manager survey suggests allocations to global equities are at record lows.

“However, with both US interest rates and unemployment heading for 4-5%, bad sentiment is not enough to prevent the S&P from making new lows for the year,” BofA analysts warned in a note.

“Our suite of 38 proprietary growth indicators shows a bleak outlook for global growth, but we are staring at one of the most aggressive tightening episodes in history, with 85% of global central banks in tightening mode.”

Most of the banks meeting this week – from Switzerland to South Africa – are expected to increase, with markets divided on whether the Bank of England will go with 50 or 75 basis points. read more

“The latest UK retail sales data supports our view that the economy is already in recession,” said Jonathan Petersen, senior market economist at Capital Economics.

“So, despite sterling hitting a new multi-decade low against the dollar this week, the relative strength of the US economy suggests to us that sterling will remain under pressure.”

Sterling was stuck at $1.1396 after hitting a 37-year low of $1.1351 last week,

One exception is the Bank of Japan, which has so far shown no sign of abandoning its unsophisticated yield curve policy despite the drastic fall in the yen. read more

The dollar rose to 143.25 yen on Monday, retreating from a recent 24-year peak of 144.99 in the face of increasingly strict interventionist warnings from Japanese policymakers.

The euro held at $0.9991, having moved slightly away from a recent low of $0.9865 thanks to increasingly hawkish comments from the European Central Bank.

Against a basket of currencies, the dollar was up 0.3% at 109.88, not far from a two-decade peak of 110.79 reached earlier this month.

The rise in the dollar and yields have been a drag on gold, which hovered at $1,668 an ounce after hitting lows not seen since April 2020 last week.

Oil prices tried to bounce on Monday, after falling about 20% so far this quarter on worries about demand as global growth slows.

Brent gained 50 cents to $91.85 a barrel, while US crude rose 33 cents to $85.44 a barrel.

Reporting by Wayne Cole; Editing by Sam Holmes and Christian Schmollinger

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